If true, the consequences would be "shocking'

Asia set to dump unofficial dollar peg
By Andy Mukherjee - May 9 2006

LI YONG, China's vice minister for finance, said he had heard a "rumour" that the US dollar was headed for a 25 per cent drop. If the gossip was true, the consequences would be "shocking", he said.

Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the US Treasury undersecretary of international affairs.

The unspoken message was: "Don't try to talk the US dollar down."

And Adams knew better than to ask, "Well, what are you going to do about it?" The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial US dollar peg.

Even as they continue to pile up US debt in their foreign-exchange reserves to keep their currencies stable against the US dollar, Asian nations, China among them, are preparing for a scenario where the US dollar does indeed collapse under the weight of a record US current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of South-East Asian Nations. The 13-nation group said it will sponsor a research project, titled "Towards greater financial stability in the Asian region: Exploring steps to create regional monetary units".

This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy-making.

Both Japan and China are extremely serious about it and are vying to take ownership of the project.

An Asian Currency Unit (ACU), will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.

What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.

The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.

South Korea, Japan and China agreed to "immediately launch discussions on the road map for a system to coordinate foreign exchange policy".

The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.

Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modelled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the US dollar.

The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the US dollar is no longer perceived as a safe storage of value.

So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year. - Bloomberg

(The writer is a Bloomberg News columnist. The opinions expressed are his own.)

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